Bank of England expected to talk up Brexit risks and inflationary pressure
The Bank of England will meet to decide on interest rates this Thursday, with the ongoing risk of the United Kingdom crashing out of the EU without a deal in place by March 29th likely to cast a large shadow over proceedings. The BoE also releases its quarterly inflation report on Thursday; the report could catch markets off guard if the central bank significantly upgrades its inflation projections.
Most market participants expect that the Monetary Policy Committee will vote unanimously to leave rates on hold at 0.75 percent, the key for investors will be the central bank’s forward guidance regarding the timing of future rate hikes. Inflationary pressure continues to build in the United Kingdom economy, as was evident in recent UK wage and employment data.
UK employment hit a record high in November, while UK wage growth has returned to levels not seen since the financial crisis of 2008. The United Kingdom’s unemployment rate also dipped to four percent, marking its lowest level since the 1970s during the three months to November 2018.
Overall annual CPI inflation remains above the Bank of England’s target of two percent, while monthly UK CPI increased 0.20 percent in December last year, which is largely in line with its historical monthly average of 0.22 percent. General indications are that despite Brexit uncertainty, the BoE will mention that UK inflationary pressures are steadily building during Thursday’s policy statement.
Market participants will also be carefully listening to the MPC’s latest Brexit risk assessment and the current effects on the UK economy from the economic slowdown well underway in the German, French and Italian economies. The Italian economy has recently fallen into a technical recession, as it posted its second consecutive quarter of GDP contraction.
The Bank of England warned about a slowdown in the global economy at its last policy meeting; the central bank’s commentary has proved to be accurate. BoE Governor Mark Carney is also likely to discuss the bank’s contingency plans for the UK economy if a Brexit no-deal scenario were to occur, alongside his usual dovish commentary regarding the unintended consequences on the UK property market and sterling if the UK crashes out of the EU without a deal in just under eight-weeks time.
GBPUSD Daily Candlestick Chart | Source: ActivTrader Platform
Sterling is starting to unwind recent gains, as traders scale back positions until the outcome of British PM Theresa May’s meeting with European negotiators is made clear, following UK lawmakers backing her amended Brexit plan. Key technical support below the 1.3100 for the GBP/USD pair in the found at the 1.2990 and 1.2860 levels, while key upside resistance is found at the 1.3095 and 1.3200 levels.
Written by Nathan Batchelor, External Analyst
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